Management 133 - California State University, Sacramento



Management 133 name: _______________________

Section 9

Final Examination, Spring 2003

Multiple Choice Questions: 2 points each.

_____ 1. Which of the following types of mergers is most likely to lead to

diversification benefits?

A) horizontal merger

B) vertical merger

C) tax free exchange

D) conglomerate

_____ 2. Jacobs and Company has warrants outstanding, which are selling at a $3

premium above formula value. Each warrant allows its owner to purchase

one share of common stock at $25. If the common stock currently sells for

$28, what is the warrant price?

A) $6

B) $3

C) $12

D) $14

_____ 3. According to the law, dividends may be funded from:

A) past earnings

B) current earnings

C) future earnings

D) Only (A) and (B) above.

_____ 4. The ex-dividend date is the date:

A) on which recipients of the dividend are determined.

B) The dividend is paid

C) The dividend is declared

D) Which no longer includes dividend payments for stock bought on that date.

_____ 5. The purpose of cumulative voting is:

A) to maintain majority control of the board of directors

B) to allow minority stockholders the possibility of a voice on the board of directors.

C) To obstruct unfriendly mergers and takeover efforts.

D) To prevent the dilution of common stock through pre-emptive rights offerings.

_____ 6. If a corporate charter includes a provision for preemptive rights, the

stockholders

A) must sell their stock to the company

B) get first option to buy additional issues of common stock

C) may purchase existing treasury stock

D) cannot utilize cumulative voting procedures.

_____ 7. A bond with a call provision would generally be sold to yield

A) less than a noncallable bond of similar character.

B) The same as a similar noncallable bond

C) More than a noncallable bond of similar character

D) The same as similar convertible bonds.

_____ 8. The higher the bond rating

A) the higher the interest rate on a bond

B) the lower the interest rate on a bond

C) the higher the call premium

D) the lower the call premium

_____ 9. Shelf registration

A) allows firms to file with the SEC 20 days before the issue date

B) is advantageous primarily to smaller investment banking firms

C) allows firms to issue securities when market conditions are more favorable than current conditions

D) more than one of the above are true

_____ 10. Financial instruments in the capital markets generally fall under what category

in the Balance Sheet?

A) Short-term liabilities and equities

B) Long-term liabilities and equities

C) Near cash assets

D) None of the above.

_____ 11. If one project has a higher standard deviation than another

A) it has a greater risk

B) it has a higher expected value

C) it has more possible outcomes

D) it may be riskier, but this can only be determined by the coefficient of variation.

_____ 12. White Knights

A) advise companies on ways to avoid being taken over

B) offer a higher purchase price and more friendly terms in the event of an unsolicited and unfriendly takeover attempt

C) attempt to make money in the stock market on stocks that are likely merger candidates

D) buy depressed stock of quality companies when merger talks are discontinued.

_____ 13. A convertible bond is currently selling for $855. It is convertible into 15

shares of common stock which presently sell for $63 per share. The

conversion premium is:

A) $90

B) $45

C) 57 shares

D) 13 shares

_____ 14. If three investment alternatives all have some degree of risk and different

expected returns, which of the following measures could best be used to rank

the risk levels of the projects?

A) Coefficient of correlation

B) Coefficient of variation

C) Standard deviation of returns

D) Net present value

_____ 15. Security markets are efficient when each of the following exist except

A) security prices follow the leading indicators such as the DJIA very closely

B) the markets can absorb large dollar amounts of stock without destabilizing the price.

C) Prices adjust rapidly to new information

D) There is a continuous market where each successive trade is made at a price close to the previous trade.

_____ 16. The investment banker’s function involves all of the following except

A) take a portion of the risk in the distribution of an issue

B) always insure a company a given amount of equity can be sold so that long-range financial planning can be made accurately.

C) Make a market by buying and selling a security in insure a liquid market

D) Contract to buy securities from the corporation and resell them to other security dealers and the public.

_____ 17. A ‘subordinated debenture’

A) must be transferred with the bonds to which it is attached.

B) Is used mainly by railroad companies and usually specifies equipment as collateral.

C) Entitles the bondholder to purchase shares of common stock at a specific price.

D) Is an unsecured bond with an inferior claim on assets in the event of liquidation.

_____ 18. A stock is said to sell `ex-rights’

A) when the period in which the subscription privilege is to be exercised, has

expired.

B) when transfer of stock ownership no longer carries with it the privilege of

subscription.

C) after the rights have all been exercised and the new issue is completely sold

D) after the terms of the subscription have been made public

_____ 19. The clientele effect is concerned with

A) investor behavior and attitudes towards dividends

B) the relationship between the stockbroker and his/her client

C) the stability of dividends

D) none of the above.

_____ 20. An example of a horizontal merger would be

A) Pepsi and Sears

B) McDonalds and Pillsbury

C) Pepsi and Frito Lay

D) Coca Cola and Dr. Pepper

_____ 21. The primary purpose of a stock split is to

A) indicate the firm’s desire to retain funds

B) increase the investor’s overall wealth

C) reduce the threat of a takeover by creating more shares

D) bring the stock price to a lower trading range.

_____ 22. If a preferred stock is of the cumulative type

A) dividends must be paid on an equal basis with common so long as

earnings permit.

B) dividends cannot be passed if they are earned.

C) The cumulative voting rule applies in the exercise of the voting privilege

D) Unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common stockholders

_____ 23. The document that outlines the covenants and duties existing between

bondholders and the issuing corporation is called

A) an indenture

B) a debenture

C) secured debt

D) protective covenants

_____ 24. Which of the following is not a money market instrument?

A) Treasury bills

B) Commercial paper

C) Negotiable certificates of deposit

D) Treasury bonds

_____ 25. In issuing stock, the term `spread’ refers to

A) the profit the managing investment banker gets for an issue of stock

B) the disparity between the initial asking price and the average price for the stock issued some months later.

C) The difference between what the corporation gets for new issues of stock and what the public pays for the stock

D) The total cost to the corporation for issuing new stock.

_____ 26. The term `debenture’ refers to

A) long-term, secured debt

B) long-term, unsecured debt

C) the after-acquired property clause

D) the 100 page document covering the specific terms of the offering.

_____ 27. A proxy is

A) a device for circumventing regular voting procedures

B) a coupon attached to each share of stock and used by the shareholder in casting his or her vote on current issues

C) an authorization of a registered stockholder to another person to act is his or her place at the meeting.

D) A warrant allowing a stockholder to purchase a specified number of additional shares of stock at a given price.

_____ 28. A stock dividend will

A) increase the total value of stockholder equity

B) decrease the total value of stockholders equity

C) not affect the total value of stockholders equity

D) change the total value of stockholders equity but the direction cannot be determined unless the market price and par value is known.

_____ 29. The interest rate on convertibles is generally __?__ the interest rate on similar

\ nonconvertible instruments.

A) greater than

B) less than

C) the same as

D) at least twice

_____ 30. Synergy is

A) the 2 + 2 = 3 effect

B) the 2 + 2 = 4 effect

C) the 2 + 2 = 5 effect

D) always present in a merger.

Problems:

5 points:

A stock sells for $45 rights-on, the subscription price is $41. Seven rights are required to purchase one share. What is the value of each right?

Problem:

5 points

Given that there are 4,000,000 shares outstanding in a corporation, how many shares will be required for a minority group of stockholders to elect 3 of the 11 members on the board of directors? (Assume cumulative voting required).

Problem:

10 points

Cooper Construction is considering purchasing new, technologically advanced equipment. The equipment will cost $625,000 with a salvage value of $50,000 at the end of its useful life of 10 years. The equipment is expected to generate additional annual cash inflows with the following probabilities for the next ten years:

Probability Cash Flow

.15 $ 60,000

.25 85,000

.45 110,000

.15 130,000

What is the expected value of the cash flows for this project?

Problem:

20 points:

Bill Broodiest, star quarterback for the Spring Bay Smashers, would like to invest a small portion of his earnings in the stock of one of a few firms. His estimates of dividends and the probabilities of their occurrence follow:

Galaxy Communications Breathiest Electronics

Probability Dividend Probability Dividend

.2 $ 0 .1 $ 500

.4 700 .2 700

.4 800 .4 900

.2 900 .2 1,100

.1 1,200

Put answers below; provide work on next page.

A) 4 points each: What is the expected value for each investment?

B) 12 points: What is the standard deviation and coefficient of variation for each?

C) 4 points: If a third investment, with an expected value of $930 and a standard deviation of $200.25 existed, which of the THREE investments should Broodiest choose?

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